The Importance of Cash Flow Planning for Closely Held Businesses

Date01 November 2015
Published date01 November 2015
© 2015 Wiley Periodicals, Inc.
Published online in Wiley Online Library (
DOI 10.1002/jcaf.22098
The Importance of Cash Flow
Planning for Closely Held Businesses
Caroline D. Strobel
Estate planning
for owners of
closely held
businesses involves a
number of difficult
decisions, not the least
of which is determin-
ing the ability of the
business to generate
sufficient cash flow
to cover estate taxes
and generate sufficient
working capital to
maintain and continue
to grow the business. Closely
held businesses can be relatively
small, involving the owner and a
few employees, or they can be a
business of significant sizewith
multiple owners and a customer
base that may even be interna-
tional in scope.
A recently published study
by the accounting firm Baker
Tilly found that four out of
five family-owned businesses
in the United States were not
ready for succession. Several of
the main challenges that they
found facing a business are
being ready for transition or
sale, and ensuring that the busi-
ness has the financial capacity
to support both retirement
and the next generation. They
noted that having a succession
plan in place can help ensure
that the transfer of knowledge,
skills, and wealth is taken into
account to maintain business
continuity and to preserve the
capital value of the business.
The most basic decision to
be made is whether or not the
business can or should continue
after the retirement or death
of the owner(s). An assessment
needs to be made as to whether
a family member is ready and
able to take over management
of the business. A number of
factors need to be
considered. The first
and most impor-
tant one is whether
the family member
really wants to work
in and manage the
particular business.
Many times, family
members want no
part in the business,
are not capable of
running the busi-
ness, or would prefer
starting their own different
business. If a family mem-
ber has been involved in the
business and has shown him/
herself to be capable of run-
ning the business, then there
is no problem as long as cash
flows are going to be adequate
to cover estate taxes when
the business is passed on to a
younger generation. However,
the introduction of a sibling
as the new leader of the busi-
ness inevitably creates new cash
flow issues. First,lenders may
curtail lending and/or require
more strenuous terms due to a
less experienced individual at
the helm of the business. Sib-
lings or, even worse, spouses
Cash flow planning for owners of closely held
businesses is an important component to the
ultimate success and continuation of that busi-
ness. This article presents a number of important
planning issues that require careful consideration
concerning the adequacy of cash flow genera-
tion. Looking ahead and planning for the smooth
transition of a business to new management is
necessary for the financial well-being of a family.
© 2015 Wiley Periodicals, Inc.

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